Small businesses face a number of distinct challenges. Many of these challenges are rooted in the fact that small businesses are forced to operate under the constraints of limited budgets. One area where this becomes a major issue is with equipment. To lease or to buy? That is the question.

“It is not a quick or simple decision,” National Business Capital points out. “Beyond the overall cost to buy or lease a piece of equipment, there are other considerations: the cost of maintenance, repairs and the possibility of tax deductions that may offset some of the cost of ownership.” There’s a lot to think about and you’ll need to weigh a number of factors during the decision-making process.

The Pros and Cons of Buying Equipment

Let’s begin with buying equipment, since this is the first option most businesses consider. Here are a few of the common advantages:

  • Total control. When you buy a piece of equipment, you enjoy all of the benefits that come with total ownership. This means you can make any alterations or repairs that you wish.
  • Tax incentives. Section 179 of the IRS Tax Code may allow you to deduct a certain percentage of the purchase price. Even if it doesn’t, you should be able to leverage the benefits of depreciation.

But buying equipment isn’t always the ideal solution. There are a handful of disadvantages, including the following:

  • Upfront cost. The biggest strike against buying equipment has to be the upfront cost. Equipment can be very expensive and may force you to cut back other expenses just to make the purchase.
  • Outdated equipment. When you buy equipment, you’re stuck with it. Unfortunately, high-tech equipment is frequently surpassed by newer models, which means you may end up with equipment that doesn’t serve your business well in the future.

The Pros and Cons of Leasing Equipment

It’s also important to look at the value of leasing. The following benefits make this the preferred option for many businesses in different industries:

  • Lower initial investment. When you lease equipment, you rarely have to make a down payment of any form. This allows you to acquire a significant tool without significantly impacting your cash flow.
  • Easy upgrades. Leasing is the solution to avoiding obsolete technology. When a piece of equipment no longer meets your needs, you can lease another item without having to eat the cost of the equipment.

In full disclosure, leasing isn’t the perfect setup. You’ll have to consider the following disadvantages and how they could affect you:

  • Higher lifetime cost. While you may not spend much on the frontend, you’re going to pay a lot more for equipment over the life of the lease. When you look at it this way, it can be hard to justify a lease.
  • No equity. Finally, you don’t get any equity with a lease. Since you don’t own the equipment, you aren’t doing anything to increase the value of the business. And at the end of the lease, you have nothing to show for it.

Consider Your Circumstances

It’s impossible to make a blanket statement regarding whether it’s better to buy or lease equipment. It all comes down to your individual business and the situation-specific factors you’re dealing with. Spend some time thinking about all of these issues before making a choice.

If you’re considering a lease, look very closely at the details related to the financing agreement, payment amount, disposition of the equipment at the end of the term, who’s responsible for maintenance and taxes, cancellation penalties, and other related information. All of these factors combined will give you a better idea of the situation.